The ranking of the 10 largest managers of defined contribution plan assets, which has been constant for several years, finally has been breached in Pensions & Investments' sixth annual survey of mutual fund managers.
The feat by Scudder Kemper Investments Inc., New York, is impressive, given the assets managed for defined contribution plans in mutual funds by the top manager, Fidelity Investments, Boston, almost doubled in the past two years to $190 billion from $96 billion as of Dec. 31, 1995.
The growth of the next three largest managers also was very strong in the same period. Total defined contribution plan assets managed by the second largest manager, The Vanguard Group of Investment Cos., Malvern, Pa., in its mutual funds increased 60% to $82 billion as of Dec. 31, 1997, from $51 billion as of Dec. 31, 1995. Merrill Lynch Asset Management, Plainsboro, N.J., increased defined contribution plan assets in its mutual funds by 48% to $58 billion from $39 billion. Total assets managed by Capital Research & Management Co., Los Angeles, also doubled, to $38.6 billion from $19 billion during the period. An accurate comparison of total assets cannot be made for the fifth-place manager, Putnam Investments, Boston, which misreported its assets in previous surveys. The assets of the 10th ranked Federated Investments, Pittsburgh, appear to be 29% lower than the year before; the difference is the result of more accurate reporting methods used this year, rather than client or investment losses, said a company spokesman.
Top 25 grow 39%
Altogether, the top 25 managers handled $557.3 billion of defined contribution plan assets in their mutual funds as of Dec. 31, a 39% increase from the $401 billion they managed a year earlier.
Scudder Kemper Retirement -- formed through the merger last year of Scudder, Stevens & Clark Inc., New York and The Zurich Group, Zurich, Switzerland, two companies which last year had occupied the 17th and 22nd rankings -- pushed up to ninth place with $10.5 billion in P&I's annual survey.
If AMVESCAP PLC, London, were to combine the defined contribution assets managed in mutual funds by its two subsidiaries, AIM Management Group Inc., Houston, and INVESCO, Denver, the total of $7.8 billion would rank 12th on the list.
Morgan Stanley Dean Witter, New York, would likely break into the top 10 largest managers if all of the defined contribution assets managed within its complex of four managers were included in its totals. Defined contribution plan assets managed by two units within the company, Morgan Stanley Institutional Investment Management, New York, and Miller Anderson & Sherrerd, West Conshocken, Pa., alone totaled $5.5 billion. Neither managed enough last year for defined contribution plans to even place in P&I's top 25 list.
Data were not received this year for Morgan Stanley's two other money management subsidiaries, Dean Witter Discover & Co., New York, and Van Kampen American Capital Management Inc. Oakbrook Terrace, Ill. In last year's survey, Dean Witter managed $3.3 billion for defined contribution plans in its mutual funds as of Dec. 31, 1996.
Morgan Stanley's growth during the past two years in defined contribution plan management was the brainchild of former consultant, Ruth Hughes-Guden, who joined the company in March 1996 from RogersCasey, Darien, Conn.
"When I joined (Morgan Stanley) two years ago, I looked over the company and saw that we had a unique advantage: two very strong investment management firms under one roof. When I looked at their strengths -- in non-U.S. equities and domestic growth strategies by Morgan Stanley and value equity and fixed-income for Miller Anderson & Sherrerd -- combined with institutionally priced mutual funds, I saw that all these strategies would serve the defined contribution plan market very well," said Ms. Hughes-Guden.
Attacking the defined contribution plan market using an investment-only strategy also has been successful, said Ms. Hughes-Guden, "because it has allowed us to concentrate on what we do best, which is investment management. We knew we couldn't compete with the big providers head-to-head on record keeping." Morgan Stanley and Miller Anderson & Sherrerd offer 45 institutionally priced mutual funds, covering most asset classes across the investment spectrum.
The company uses a consultative approach with clients, applying top-down analysis to assess current investment options offered in a defined contribution plan.
Senior marketing and relationship managers cross-selling mutual funds for defined contribution plan use to existing defined benefit plan clients also has been very successful, said Ms. Hughes. That's because the mutual funds are managed by the same portfolio managers who manage defined benefit plan accounts using the same investment strategy.
In addition to direct sales, Ms. Hughes-Guden said Morgan Stanley also is participating in several mutual fund alliances, such as Fidelity's FundsNetwork and that of Hewitt Associates LLC, Lincolnshire, Ill., which has brought the company a lot of new defined contribution plan business.
The importance of alliance-won business to Morgan Stanley's growth points out the significance of strong distribution systems to every single manager among the top 10 in P&I's survey.
Distribution is key
Of the 10, only two rely primarily on direct sales to defined contribution plan sponsors -- T. Rowe Price Associates Inc. and Vanguard. Three others -- Fidelity, American Century Investments, Kansas City, Mo., and Scudder Kemper -- garner defined contribution plan assets through direct sales and sales through intermediaries, such as financial advisers, brokers and captive sales forces. All of the rest attract these hundreds of billions of dollars from defined contribution plans almost exclusively through intermediaries, said Peter Starr, a consultant at Cerulli Associates Inc., Boston.
"Distribution is key. Except for T. Rowe Price and Vanguard, the companies on this list with the most growth are those that are very firmly entrenched in the intermediary markets, especially on the small end of the 401(k) plan market. Regarding plans with under 500 participants, where all the real growth in the defined contribution plan market is, the intermediaries really own this segment. These vendors also are increasingly relying on mutual fund alliances to bring in more 401(k) plan business," said Mr. Starr.
The growing importance of the defined contribution plan market to some of these megamutual fund managers is apparent.
Assets managed for defined contribution plans as of Dec. 31 in mutual funds represented:
* 32% of Fidelity's $607 billion firmwide total;
* 25% of Vanguard's $325 billion firmwide total;
* 34% of American Century's $62 billion firmwide total;
* 17% of Capital Research & Management's $225 billion firmwide total;
* 14% of Putnam Investment's $236 billion firmwide total; and
* 19% of T. Rowe Price's $124 billion firmwide total.
By contrast, defined contribution sources accounted for only 5% each of Franklin Resources' total $221 billion, Scudder Kemper's $200 billion and Merrill Lynch's $1.2 trillion. About 10% of Federated Investors' $92.5 billion total assets under management was from defined contribution plans.
Fidelity still leads
Among the rankings of individual funds most used by defined contribution plans, Fidelity continued its unassailable lead. Fidelity had five funds among the 10 equity funds most used by defined contribution plan investors, accounting for a total of more than $89 billion. Of the 50 largest equity funds in terms of assets managed for defined contribution plans, Fidelity had 12 funds with a total of $115 billion.
Vanguard managed three of the top 10 equity funds with a total of $32 billion and nine of the 50 largest funds with a total of $50 billion. Putnam managed one of the top 10 funds and five of the top 50, which totaled $21 billion. American Century managed one top 10 fund and three top 50 funds, totalling $13 billion. Capital Research & Management had six funds among the largest 50 equity funds for a total of $21 billion managed for defined contribution investors.
Fidelity's Magellan remained firmly in the lead with $36.4 billion managed for defined contribution plan investors, a growth of 30% or $6.1 billion from last year, despite being closed to investment by new 401(k) plans last fall.
The Fidelity Growth & Income Fund was second, with the largest dollar growth -- $6.4 billion -- among the 10 stock funds and a total of $17.9 billion managed for defined contribution plans. The Vanguard Index Trust 500 moved up to third place from fourth, with $14.1 billion, a 54% increase from last year. Fidelity's Equity Income Fund moved to fourth from fifth place with $13.4 billion managed, a 49% increase. The Vanguard Index 500 Fund and Fidelity's Equity Income Fund both pushed the Fidelity Contrafund down to fifth place with $13.1 billion, a growth of 37%.
The 12th ranking Washington Mutual Investors Fund, managed by Capital Research & Management, had a particularly good year. It grew 78% to $6.4 billion
under management for defined contribution plan investors as of Dec. 31.
At least one-third of the total assets of each of the top five equity funds is managed for defined contribution plans. Assets managed for defined contribution plans as of Dec. 31 represented:
* 58% of Magellan's $63 billion total;
* 50% of the Fidelity Growth & Income's $38 billion total;
* 29% of the Vanguard Index Trust 500's $48 billion total;
* 64% of the Fidelity Equity Income's $21 billion total; and
* 43% of the Fidelity Contrafund's $30 billion total.
Among bond mutual funds most used by defined contribution plans, Fidelity managed two of the top 10, accounting for $9.4 billion, and seven of the top 50, with $10.7 billion. Vanguard managed two of the top 10 bond funds with $1.7 billion managed for defined contribution plans and eight of the 50 largest funds with $4.1 billion.
Pacific Investment Management Co., Newport Beach, Calif., had one fund with $1.5 billion among the top 10 bond funds and three funds with a total of $2.2 billion under management in the top 50. The PIMCO Total Return-Institutional Fund had spectacular growth of 106% to $1.456 billion managed for defined contribution plan investors as of Dec. 31, compared with $707 million the previous year.
Federated Investors had one fund in the 10 largest bond funds with $654 million, but had seven funds in the top 50 funds, with a total of $2.9 billion.
Some of the biggest success stories among individual funds were international equity funds.
The Capital Research & Management EuroPacific Growth Fund remained in the No. 1 spot with $5 billion under management for defined contribution plans, a 31% growth. The Templeton Foreign Fund had $4.699 billion for a second-place ranking, a growth of 71% from $2.753 billion last year.
The biggest growth of a fund in any category for defined contribution plan assets was recorded by the Janus Worldwide Fund, which saw assets soar 309%, to $2.366 billion under management for plan investors as of Dec. 31, up from $579 million the previous year.